Form 2439, titled "Notice to Shareholder of Undistributed Long-Term Capital Gains," is issued by regulated investment companies (RICs), such as mutual funds, and real estate investment trusts (REITs), to inform shareholders of capital gains that the entity retained and paid tax on during its tax year. Although shareholders did not receive these gains in cash, they must be reported as taxable income on the shareholder’s individual tax return. The form includes details about the undistributed long-term capital gains and the tax paid by the RIC or REIT on those gains.
Key Sections of Form 2439
- Box 1a: Reports the total undistributed long-term capital gains allocable to the shareholder. This amount must be reported as a long-term capital gain on Schedule D (Form 1040), line 11.
- Box 1b: Indicates the portion of the undistributed gain that is unrecaptured section 1250 gain (from the sale of depreciable real property). If applicable, this amount is reported on the Unrecaptured Section 1250 Gain Worksheet (if completing line 19 of Schedule D).
- Box 1c: Reflects gain attributable to qualified small business stock (section 1202 gain). This is reported under the Exclusion of Gain on Qualified Small Business (QSB) Stock rules.
- Box 1d: Shows collectibles gain (28% rate gain). This amount is reported on line 4 of the 28% Rate Gain Worksheet (if completing line 18 of Schedule D).
- Box 2: Displays the tax paid by the RIC or REIT on the undistributed gains. Shareholders must report this tax on Schedule 3 (Form 1040), line 13a. Additionally, the shareholder must increase the basis of their stock by the excess of the amount included in income over the tax credit received.
Reporting Requirements for Shareholders
- Include the amount from Box 1a on Schedule D, line 11.
- Report any amounts in Boxes 1b, 1c, or 1d according to their respective worksheets or exclusions as described in the instructions.
- Report the tax paid (Box 2) on Schedule 3 (Form 1040), line 13a.
- Attach Copy B of Form 2439 to your income tax return for the tax year that includes the last day of the RIC’s or REIT’s tax year.
Special Instructions for Nominees and IRAs
- If you are a nominee (e.g., a broker holding shares for a client), you must complete Copies A, B, C, and D for each actual owner. The amounts must match those reported by the RIC or REIT.
- If the shareholder is an IRA, send Copies B and C to the IRA trustee or custodian, not to the IRA owner.
Tax Rule Reference
The reporting and taxation of undistributed capital gains are governed by Internal Revenue Code sections 852(b)(3)(D) and 857(b)(3)(C), which require RICs and REITs to pay tax on undistributed capital gains and provide shareholders with Form 2439 for reporting purposes.
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Disclaimer: Always verify information with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.